Bank of England Cut base rate by 0.5% to 1%

[Smiley]

An index linked gilt may get round this as the principle repaid is proportional to inflation. However the income return is lower and the governments definition of inflation may not be yours so your return is still lower.

You are right. I have been having trouble getting full details on index linked gilts. I have invested in some std gilts and they are doing very well right now. But I would like to get info on the IL category; any ideas where to get the info please?

 

[st4]

You are right. I have been having trouble getting full details on index linked gilts. I have invested in some std gilts and they are doing very well right now. But I would like to get info on the IL category; any ideas where to get the info please?

right here

Bear in mind this bit

"Index-linked gilts differ from conventional gilts in that both the semi-annual coupon payments and the principal payment are adjusted in line with movements in the General Index of Retail Prices in the UK (also known as the RPI")

What you need then to look at how the RPI is calculated and some of the weightings therein.

Interpret that as you will but RPI and what you feel is inflation may be very different things.

 

[Smiley]

right here

Bear in mind this bit

"Index-linked gilts differ from conventional gilts in that both the semi-annual coupon payments and the principal payment are adjusted in line with movements in the General Index of Retail Prices in the UK (also known as the RPI")

What you need then to look at how the RPI is calculated and some of the weightings therein.

Interpret that as you will but RPI and what you feel is inflation may be very different things.

Thanks. I understand exactly how normal gilts work and I understand the principles of index linking - the two "interest" payments per year go up and down in line with RPI.
What I am still not clear on is the level of payment and the final redemption.
Going back to a std gilt for a moment - if it was a 5% gilt maturing in 2025 then the redemption payment is the nominal value - say £100. Along the way £5pa interest will be paid - so if today the gilt is priced at £110 then the interest is about 4.5% and there will be a capital loss of £10 in 2025.
If I look at the 2.5% IL gilt 2016 the current price is £282. If we assume RPI is 3% just as an example what does this mean thet the IL2016 gilt will yield - is 5.25% - of what - the original nominal £100? I suspect that the redemption payment must be different to std gilts for the trading price to be as high as £282 - otherwise there would be a wack of a capital loss.
I have looked through the govt web links but it is not set out very clearly - talks about redemption and coupon payments - and a "dirty" price - but without explanation.
I would really like to learn more as these IL gilts could become a wealth saver not too far down the line.

 

[st4]

.
If I look at the 2.5% IL gilt 2016 the current price is £282. If we assume RPI is 3% just as an example what does this mean thet the IL2016 gilt will yield - is 5.25% - of what - the original nominal £100? I suspect that the redemption payment must be different to std gilts for the trading price to be as high as £282 - otherwise there would be a wack of a capital loss.
I have looked through the govt web links but it is not set out very clearly - talks about redemption and coupon payments - and a "dirty" price - but without explanation.
I would really like to learn more as these
IL gilts could become a wealth saver not too far down the line.

Crikey. £282 per £100 nominal.

The final redeption amount is £100 + the inflation on the £100 over the period to 2016 Says its 3%/yr, in Y1 you have £100, Y2 £103, Y3 £106.60 principle. Therefore the principle redeemed is real terms (RPI terms) is the same as what you put in.

The yield is based on the nominal value, but this goes up every year with inflation too and you get 2.5% interest per year on each amount. In the 1st year you'd get 2.5% of £100 income, in Y2 if inflation was 3% you'd get 2.5% of £103 and so on and so forth.

yes, 5.25% rise per total/yr if inflation rises by 3%yr. £282/£100 does seem steep though.

Thats really as far as my understanding of them goes, I am afraid I may end up giving you duff advice if I am wrong so if I am anyone care to correct me so far on what I've said.

 

[Smiley]

Crikey. £282 per £100 nominal.

The final redeption amount is £100 + the inflation on the £100 over the period to 2016 Says its 3%/yr, in Y1 you have £100, Y2 £103, Y3 £106.60 principle. Therefore the principle redeemed is real terms (RPI terms) is the same as what you put in.

The yield is based on the nominal value, but this goes up every year with inflation too and you get 2.5% interest per year on each amount. In the 1st year you'd get 2.5% of £100 income, in Y2 if inflation was 3% you'd get 2.5% of £103 and so on and so forth.

yes, 5.25% rise per total/yr if inflation rises by 3%yr. £282/£100 does seem steep though.

Thats really as far as my understanding of them goes, I am afraid I may end up giving you duff advice if I am wrong so if I am anyone care to correct me so far on what I've said.

OK I will do some more digging. On that basis the inflation "element" the £3pa in our case above gets added to the redemption value of the gilt whilst the 2.5% is a constant payout. If you are right and the 2.5% is paid out on the rolled up total value each year then it would explain why the price is so high - the 2016 has been running since 1983 so it has 26 yrs of inflation built on top of the £100. I had assumed that the annual payout would be 2.5% plus inflation of whatever but that is clearly wrong.

 

[wemorgan]

now the even scarier thing is that the great depression was only reversed by demand created by WW2.

Fear not....the USA are going to save the world again

 

[crockers]

They are a "safer" bet than equities only because they are less volatile. They are no safer even if you hold them from inception to redemption because it depends what happens to interest rates and inflation in the meantime. Holding gilts to redemption will be no good at all if we get mega inflation - they will be as bad as holding cash.

Agree totally - but *** said they were a safe bet not a safer bet - that was what I was querying .....(may just have been a typo.)

Then hold index linked gilts if you are worried about mega inflation - ordinary gilts if you are worried about deflation.

 

[Smiley]

Agree totally - but *** said they were a safe bet not a safer bet - that was what I was querying .....(may just have been a typo.)

Then hold index linked gilts if you are worried about mega inflation - ordinary gilts if you are worried about deflation.

thats my view as well. probably need to add cheap high yielding shares as well if there is inflation, what you do NOT want is cash.

Anyone know all about the IL gilts?